Dynamic pricing is a pricing strategy that businesses use to set flexible prices for products or service based on current market demand. Also known as surge or demand pricing, dynamic pricing is common in eCommerce, hospitality, tourism, entertainment and some service industries.
Most people would have experienced dynamic pricing at some point, it is the peak fares you pay for seasonal flights and accommodation or the Ride Share you paid more for when a major event was on. It’s when electricity providers give you a discount for running your dishwasher, washing machine or dryer at certain times of the day.
Dynamic pricing can be unpopular when consumers feel it favours those consumers who are less likely to be priced out of a market during high demand.
Dynamic pricing means the price of goods or services can change over time. In contrast, fixed pricing is a pricing strategy where fixed prices are established and maintained over an extended period. The consistent nature of fixed pricing allows customers to become accustomed to prices and is less likely to offend them than fluctuating, dynamic pricing.
Simply put, the practice of dynamic pricing is selling goods and services at different price points, to different customers or at different times. The aim of dynamic pricing is to maximise profits based on the perception of how much a consumer is willing to pay for a good or service at a specific time.
Scarcity, demand and the long-term viability of a product can influence dynamic pricing. For example, a hotel will sell rooms at varying rates across discount booking sights, tourism providers or hotel loyalty programs. Prices may rise in peak periods or be reduced as last minute deals in order to fill the rooms.
Advantages of dynamic pricing
A key advantage of dynamic pricing is that it allows for pricing to reflect demand. Suppliers of fresh food and produce will lower prices when produce is in season and in abundant supply then raise prices as supply wanes or if an external event has reduced supply. A seafood supplier, for example, will often vary prices depending on the season or the availability of inventory stock.
Often viewed only as a way for businesses to increase prices, there are also times when it is used to increase profits by adjusting prices down to boost slow sales, meet sales targets or clear inventory stock through something as simple as a flash.
Dynamic pricing can create higher levels of demand and is often used at events where to generate whatever revenue possible when initial demand is low. If event day arrives and seating is still available, these seats may be offered at lower prices to loyal customers or a way to attract new customers.
In addition, dynamic pricing can improve insights into consumer behaviour. Numerous data points can be used to create a demand curve to calculate the minimum and maximum price a customer is willing to pay for a specific transaction, increasing the likelihood that a sale will eventually be made.
Disadvantages of dynamic pricing
Dynamic pricing can reduce brand loyalty, increase competition and has the potential to lead to price wars. A key disadvantage of dynamic pricing is that it can alienate customers if they discover they’ve been paying higher prices for the same product as someone else.
This can lead to consumer distrust if customers feel they were somehow cheated or ripped-off, damaging a company’s brand loyalty and increasing the chance customers will go elsewhere.
Competition increases when customers are not loyal to any given company, they will go to wherever they can get the best deal, particularly in eCommerce where online shoppers can quickly compare prices across several businesses.
If a company is using dynamic pricing to price its inventory stock low, it can force competitors to reduce their prices in order to compete. The increased competition can lead to price wars like those commonly seen in the airline industry when new competitors come into an established market. Price wars lower profit margins and while good for consumers are bad for businesses.
Another challenge for companies using this pricing strategy is the need for an advanced software solution to optimise price adjustments over time or to be programmed to adjust prices based on real-time demand.
Best implemented using software
Dynamic pricing is about finding the optimum price for your products and is best implemented when price optimisation is automated throughout the year. Manual processes are extremely time-consuming and prone to error and poor interpretation of the data.
Advanced price comparison technology and automated software solutions help optimise prices based on data and because dynamic pricing is grounded on large levels of advanced data, businesses need technology solutions to automate the process to maximise its benefits.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.